Brickworks warns of shift to imports amid looming energy crunch

Building materials supplier Brickworks has begun studies into shifting some production offshore – to either New Zealand or Malaysia — as it prepares for steep rises to energy prices over the next few years that are threatening to squeeze margins.

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The company has warned that the surge in gas prices will add $20 million to its costs over the next few years that it will not be able to absorb.

“We’re looking at alternative markets such as New Zealand and Malaysia,” the group’s managing director, Lindsay Partridge, said. “Malaysia already has a well-developed brick sector.

“Brick prices from Spain are very cheap, and back-freight prices are also cheap,” he said of sourcing product from this market.

“We do have to look at it,” he said, since the company would not be able to pass on the full extent of the price rises needed to offset the looming surge in gas and electricity prices, he warned. The company was also facing the prospect of a lack of gas supply from 2025, on present indications, he said.

The federal government last week held a meeting with senior gas industry representatives to force them to commit to providing more gas to the domestic market, to head off both a supply and a price squeeze.

While two of the three large gas exporters from Queensland have undertaken to lift supplies to the domestic market, any change is expected to take time.

Brickworks already sources some of its bricks from Spain, where the deep economic downturn has helped to make some of this product competitive.

Brickworks has contracted gas supplies until the beginning of 2020 but with supplies for 2019 priced at “76 per cent above where we are today”, Mr Partridge said. Similarly, the company was facing steep rises in the price of electricity.

“On the forward price curve we are facing up to an 80 per cent increase”, he said of the outlook for the price of electricity.

Mr Partridge’s warnings came as the company said it was enjoying a “full order book” across the east coast of Australia, where builders have a long pipeline of work, with little change expected through to the middle of the year at least.

Activity in the building industry was being hampered by “trade shortages and a lack of titled land”, the company warned, with the housing industry operating at what it termed “natural capacity”.

“Even so, activity is expected to remain elevated for the next few years, with only a gradual tapering of activity likely,” Mr Partridge said.

“There is a reasonable supply of bricklayers, but we hear stories of delays with, for example, windows and the like,” which could serve to slow activity.

“Also, when there’s wet weather, like we’ve been having recently, supplies can’t catch up. We’ve got two to three years of east coast strength,” he said. “We might see a tapering in detached housing with multi-dwelling a little quicker.”

In some regions, such as NSW, “we’ve never had so many quotes out” for multi-dwelling projects, he said. “It has been astounding. We see no indication it will taper.”

Given the size of these projects, they will take some years to complete, with the prospect of continued buoyant activity for a few years yet, he said.

Mr Partridge was speaking after Brickworks reported a net profit of $104.1 million for the six months to January, up from $76.9 million on revenue of $428.9 million up from $360 million.

Earnings a share rose to 69.8?? from 51.8?? with an interim dividend of 17?? declared, up from 16?? a year earlier.

“Building products earnings for the 2017 financial year will be underpinned by a full order book and a long pipeline of work at higher margins in our major east coast markets,” the company said.

“Land and development earnings are expected to be higher for full year 2017, following the strong first half. Investments earnings are expected to deliver steadily increasing earnings and dividends over the long term.”

Despite the strong market conditions across much of the east coast of Australia, softness in Western Australia in particular remained a drag, it said, although it appeared to be through the worst of its downturn.

“In WA, the sharp downturn in building activity has resulted in a significant decline in sales, [but] conditions appear to have stabilised over the past few months and building activity is not expected to decline further,” it told shareholders.

“Nevertheless … it will be necessary to reduce brick production by mothballing some manufacturing capacity during the second half.

“The impact of reduced production will be offset by the extensive restructuring initiatives undertaken during the first half that will result in lower unit production costs at the Cardup plant.”